WASHINGTON — The Senate Banking Committee is preparing next month to vote on a deal to roll back bank regulations, but Federal Deposit Insurance Corp. Chairman Martin Gruenberg warned against enacting at least three of the provisions.

During a press conference Tuesday, Gruenberg said raising the Dodd-Frank systemic bank threshold to $250 billion from $50 billion was an error, suggesting it was too high.

“There is room for adjustment in the $50 billion asset threshold for intuitions to be subject to the enhanced prudential standards, but I also raise caution in testing that,” Gruenberg said. "$250 billion might go further than appropriate."

FDIC Chairman Martin Gruenberg
“A safe harbor says that if a smaller institution doesn’t engage in the activities covered under the Volcker Rule, then they would have no compliance obligation, but if they do engage in the activities, they would be subject to supervisory oversight,” said FDIC Chairman Martin Gruenberg. Bloomberg News

He argued that even banks below the current $50 billion threshold can incur significant costs if they fail. For example, he noted that the $33 billion-asset IndyMac, which failed in 2009, proved to be the most expensive bank failure in FDIC's history, at more than $10 billion.

Under the bill, which was an agreement struck between Senate Banking Committee Chairman Mike Crapo and several Democrats and Republicans, the threshold would be immediately raised to $100 billion and then further increased to $250 billion after 18 months. The Federal Reserve Board would still have the ability to target banks with between $100 billion to $250 billion of assets if it determined they posed a threat to the economy.

Gruenberg also objected a proposed change to the Dodd-Frank supplementary leverage ratio. The provision requires banks to hold a 3% ratio of equity to on-balance-sheet assets and off-balance-sheet exposures. Global systemic financial institutions have to meet a more rigorous 5% ratio called the enhanced supplementary leverage ratio.

The Senate bill would allow custodial banks to exempt deposits at central banks from the enhanced supplementary leverage ratio calculation, which would mean they wouldn’t have to hold as much equity.

“Deductions from the denominator of the enhanced supplementary ratio which applies to the systemically important financial institutions ... there is a provision in the bill that impacts that so that would be a matter of concern,” Gruenberg said.

Additionally, Gruenberg raised concerns about a change to the Volcker Rule, which was created by Dodd-Frank to prevent banks from proprietary trading with customer deposits.

“On the Volcker Rule, I think there is room to reduce compliance” for smaller institutions with assets of less than $10 billion, Gruenberg said. But he said he preferred a “safe harbor” approach for smaller institutions, whichy typically don’t have as much trading activities as larger banks.

“A safe harbor says that if a smaller institution doesn’t engage in the activities covered under the Volcker Rule, then they would have no compliance obligation, but if they do engage in the activities, they would be subject to supervisory oversight,” he said.

The Senate deal would exempt banks with assets of less than $10 billion from the rule, which means even if a bank did have a significant trading operation, it wouldn’t have to comply with the rule if it was below the asset threshold.

Gruenberg's term as FDIC chairman expires at the end of the month, but he can stay at the post until the Trump administration taps a replacement. Gruenberg also has a separate term as an FDIC board member that extends into next year, and he said he hadn't decided whether he will stay at the FDIC beyond his chairmanship.

A committee vote on the Senate bill is scheduled for Dec. 5.

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